Scotia Capital, 4 March 2009
Q1/09 Underlying Earnings Strong
• Bank of Montreal (BMO) reported cash operating earnings of $1.09 per share versus $1.21 per share a year earlier. Operating ROE was 13.6%.
• Earnings were less than our estimate due to extremely high loan losses at 0.89% of loans, $0.09 per share drag versus our estimate, and securities losses of $0.11 per share. Underlying earnings were strong led by BMO Capital Markets, aided by strong trading revenue, and strong P&C Canada earnings growth of 12%.
• Reported cash earnings were $0.40 per share including net charges of $528 million ($359 million after-tax or $0.69 per share) in BMO Capital Markets and the Private Client Group. Charges included mark-to-market valuations on credit derivatives of $214 million ($146 million after-tax or $0.28 per share), charges relating to Apex of $248 million ($169 million after-tax or $0.33 per share), a writedown of $49 million ($33 million after-tax or $0.06 per share) relating to non-bank ABCP, and unrealized charges of $17 million ($11 million aftertax and $0.02 per share) on auction rate securities. Reported ROE was 5.0%.
• Earnings were driven by BMO Capital Markets up 79%, with P&C Canada earnings increasing 12% and P&C U.S. increasing 21% due to the weaker C$. Private Client Group earnings declined 29%.
• Revenue increased 18.0%, with expenses increasing 11.6% for positive operating leverage of 6.4%.
P&C Canada Earnings Increase 12%
• P&C Canada earnings increased 12% to $326 million from a year earlier driven by volume growth and improvement in the retail net interest margin. Retail net interest margin in Canada improved 14 bp from a year earlier and 10 bp sequentially to 2.72% mainly due to repricing initiatives and favourable prime-BA spreads.
• Personal loan growth was strong at 21%, resulting in a market share gain of 80 bp YOY and 8 bp sequentially. Personal deposits were up slightly from a year earlier with market share improving 22 bp YOY and 31 bp sequentially.
• Securitization revenues were high at $264 million versus $80 million a year earlier. P&C U.S. Earnings Increase 21%
• P&C U.S. cash earnings increased 21% to $40 million from a year earlier, mainly due to the weak C$.
• The P&C U.S. retail NIM increased 5 bp sequentially but declined 8 bp year over year to 3.05%.
Overall Net Interest Margin
• The overall net interest margin for the bank declined 20 bp sequentially but improved 7 bp year over year to 1.57%.
Private Client Group Earnings Decline
• Private Client Group (PCG) earnings in Q1 declined 29% YOY to $69 million (excluding one-time items) from $97 million a year earlier.
• Revenue declined 8.5%, with expenses increasing 4.2% for negative operating leverage of 12.7%.
• Mutual fund revenue declined 26% YOY to $114 million. Mutual fund assets under management (as reported by IFIC) declined 22% YOY to $28.6 billion.
BMO Capital Markets Earnings Very Strong
• BMO Capital Markets earnings increased 79% (excluding charges) to $527 million from a year earlier due to strong trading revenue.
Trading Revenue Strong
• Trading revenue (excluding writedowns) was very strong at $567 million versus $283 million in the previous quarter and $171 million a year earlier.
Capital Markets Revenue Declines YOY
• Capital markets revenue declined 10% YOY to $325 million from $363 million.
• Underwriting and advisory fees declined 16% YOY to $77 million and securities commissions and fees declined 8% to $248 million.
Security Gains
• BMO recorded security losses in the quarter of $88 million or $0.11 per share versus a loss of $0.03 per share in the previous quarter and a gain of $0.03 per share a year earlier.
• Unrealized security surplus was a surplus of $137 million versus a deficit of $121 million in the previous quarter and a surplus of $89 million a year earlier.
LLPs Increase - Large Losses in U.S. Developer Portfolio
• Specific LLPs were higher than expected at $428 million or 0.89% of loans versus $315 million or 0.67% of loans in the previous quarter and $170 million or 0.40% of loans a year earlier.
• The major spike in loan loss provisions was in Commercial P&C U.S. and related mainly to the developer portfolio as LLPs increased to $148 million versus $45 million in the previous quarter. Also, Corporate U.S. LLPs spiked to $125 million up from $81 million in the previous quarter and $58 million a year earlier. Retail loan losses in Canada increased to $88 million from $64 million in the previous quarter.
• The bank's US$42.0 billion U.S. loan portfolio accounted for the majority of LLPs this quarter with the U.S. developer portfolio, representing less than 1% of total loans, accounting for 30% of the bank's LLPs. In addition, approximately $25 million in loan loss provisions related to credit card fraud event (Heartland).
• We are increasing our 2009 and 2010 LLP forecasts to $1,700 million, or 0.85% of loans and $1,800 million or 0.85% of loans from $1,400 million or 0.70% of loans and $1,600 million or 0.76% of loans, respectively.
Impaired Loan Formations
• Gross impaired loan (GIL) formations increased to $712 million from $708 million a year earlier but declined from $806 million last quarter.
• Net impaired loan formations increased to $770 million from $729 million a year earlier but declined from $976 million in the previous quarter.
• The coverage ratio (ACLs as a percentage of GILs) deteriorated to 65% from 73% in the previous quarter and from 91% a year earlier.
Capital Ratios Strong
• Tier 1 Capital was 10.2% versus 9.8% in the previous quarter and 9.5% from a year earlier.
• Risk-weighted assets increased 8% from a year earlier to $193.0 billion. Market-at-risk assets declined 33% year over year to $12.4 billion.
• The total capital ratio was strong at 12.9% at the end of the quarter versus 12.2% in the previous quarter and 11.3% a year earlier.
SIVs – Assets Continue to Decline
• Links and Parkland SIV assets declined to US$5.6 billion and €0.62 billion net of cash, as at January 31, 2009, from US$6.8 billion and €0.70 billion in the previous quarter and US$23.4 billion and €3.4 billion at the end of July 2007. The pace of asset sales is slowing.
• Liquidity facilities extended by BMO for Links and Parkland as at January 31, 2009, declined to US$7.1 billion and €0.64 billion, respectively, versus US$8.8 billion and €0.8 billion at the end of April 2008.
Credit Protection Vehicle - Apex
• On May 1, 2008, BMO restructured Apex Trust by providing investors with mid-term notes in Apex Trust with terms of five to eight years in exchange for their original holdings. As part of the restructuring, BMO entered into credit default swap contracts with counterparties and entered into offsetting contracts with Apex Trust. BMO provides a senior funding facility of $1.0 billion and has exposure of $815 million through investment in mid-term notes. The current carrying value of the notes is $448 million after writedowns of $367 million ($248 million in Q1/09).
• BMO believes the credit quality of the trust is sound, with over 70% considered investment grade and a substantial first-loss protection in place.
Fairway – U.S. ABCP Conduit
• Fairway is a BMO-sponsored U.S. ABCP conduit. At the end of January, backstop liquidity facilities were US$7.5 billion down from US$8.2 billion in the previous quarter.
Monoline Exposure
• BMO has direct notional exposure to monolines and credit derivative counterparties of $4.3 billion with $719 million mark-to-market exposure. Counterparties: 91% rated A or better, 83% rated AA or better.
Recommendation
• We are reducing our 2009 and 2010 earnings estimates to $4.45 per share and $4.80 per share from $4.85 per share and $5.00 per share due to higher loan loss provision estimates.
• We are reducing our 12-month share price target to $42 from $45. Our new target price represents a conservative 9.4x our 2009 earnings estimate and 8.8x our 2010 earnings estimate.
• BMO is rated 2-Sector Perform with strong relative retail earnings momentum, although overall low profitability and attractive dividend yield are partially offset by higher off balance sheet risk.
Q1/09 Underlying Earnings Strong
• Bank of Montreal (BMO) reported cash operating earnings of $1.09 per share versus $1.21 per share a year earlier. Operating ROE was 13.6%.
• Earnings were less than our estimate due to extremely high loan losses at 0.89% of loans, $0.09 per share drag versus our estimate, and securities losses of $0.11 per share. Underlying earnings were strong led by BMO Capital Markets, aided by strong trading revenue, and strong P&C Canada earnings growth of 12%.
• Reported cash earnings were $0.40 per share including net charges of $528 million ($359 million after-tax or $0.69 per share) in BMO Capital Markets and the Private Client Group. Charges included mark-to-market valuations on credit derivatives of $214 million ($146 million after-tax or $0.28 per share), charges relating to Apex of $248 million ($169 million after-tax or $0.33 per share), a writedown of $49 million ($33 million after-tax or $0.06 per share) relating to non-bank ABCP, and unrealized charges of $17 million ($11 million aftertax and $0.02 per share) on auction rate securities. Reported ROE was 5.0%.
• Earnings were driven by BMO Capital Markets up 79%, with P&C Canada earnings increasing 12% and P&C U.S. increasing 21% due to the weaker C$. Private Client Group earnings declined 29%.
• Revenue increased 18.0%, with expenses increasing 11.6% for positive operating leverage of 6.4%.
P&C Canada Earnings Increase 12%
• P&C Canada earnings increased 12% to $326 million from a year earlier driven by volume growth and improvement in the retail net interest margin. Retail net interest margin in Canada improved 14 bp from a year earlier and 10 bp sequentially to 2.72% mainly due to repricing initiatives and favourable prime-BA spreads.
• Personal loan growth was strong at 21%, resulting in a market share gain of 80 bp YOY and 8 bp sequentially. Personal deposits were up slightly from a year earlier with market share improving 22 bp YOY and 31 bp sequentially.
• Securitization revenues were high at $264 million versus $80 million a year earlier. P&C U.S. Earnings Increase 21%
• P&C U.S. cash earnings increased 21% to $40 million from a year earlier, mainly due to the weak C$.
• The P&C U.S. retail NIM increased 5 bp sequentially but declined 8 bp year over year to 3.05%.
Overall Net Interest Margin
• The overall net interest margin for the bank declined 20 bp sequentially but improved 7 bp year over year to 1.57%.
Private Client Group Earnings Decline
• Private Client Group (PCG) earnings in Q1 declined 29% YOY to $69 million (excluding one-time items) from $97 million a year earlier.
• Revenue declined 8.5%, with expenses increasing 4.2% for negative operating leverage of 12.7%.
• Mutual fund revenue declined 26% YOY to $114 million. Mutual fund assets under management (as reported by IFIC) declined 22% YOY to $28.6 billion.
BMO Capital Markets Earnings Very Strong
• BMO Capital Markets earnings increased 79% (excluding charges) to $527 million from a year earlier due to strong trading revenue.
Trading Revenue Strong
• Trading revenue (excluding writedowns) was very strong at $567 million versus $283 million in the previous quarter and $171 million a year earlier.
Capital Markets Revenue Declines YOY
• Capital markets revenue declined 10% YOY to $325 million from $363 million.
• Underwriting and advisory fees declined 16% YOY to $77 million and securities commissions and fees declined 8% to $248 million.
Security Gains
• BMO recorded security losses in the quarter of $88 million or $0.11 per share versus a loss of $0.03 per share in the previous quarter and a gain of $0.03 per share a year earlier.
• Unrealized security surplus was a surplus of $137 million versus a deficit of $121 million in the previous quarter and a surplus of $89 million a year earlier.
LLPs Increase - Large Losses in U.S. Developer Portfolio
• Specific LLPs were higher than expected at $428 million or 0.89% of loans versus $315 million or 0.67% of loans in the previous quarter and $170 million or 0.40% of loans a year earlier.
• The major spike in loan loss provisions was in Commercial P&C U.S. and related mainly to the developer portfolio as LLPs increased to $148 million versus $45 million in the previous quarter. Also, Corporate U.S. LLPs spiked to $125 million up from $81 million in the previous quarter and $58 million a year earlier. Retail loan losses in Canada increased to $88 million from $64 million in the previous quarter.
• The bank's US$42.0 billion U.S. loan portfolio accounted for the majority of LLPs this quarter with the U.S. developer portfolio, representing less than 1% of total loans, accounting for 30% of the bank's LLPs. In addition, approximately $25 million in loan loss provisions related to credit card fraud event (Heartland).
• We are increasing our 2009 and 2010 LLP forecasts to $1,700 million, or 0.85% of loans and $1,800 million or 0.85% of loans from $1,400 million or 0.70% of loans and $1,600 million or 0.76% of loans, respectively.
Impaired Loan Formations
• Gross impaired loan (GIL) formations increased to $712 million from $708 million a year earlier but declined from $806 million last quarter.
• Net impaired loan formations increased to $770 million from $729 million a year earlier but declined from $976 million in the previous quarter.
• The coverage ratio (ACLs as a percentage of GILs) deteriorated to 65% from 73% in the previous quarter and from 91% a year earlier.
Capital Ratios Strong
• Tier 1 Capital was 10.2% versus 9.8% in the previous quarter and 9.5% from a year earlier.
• Risk-weighted assets increased 8% from a year earlier to $193.0 billion. Market-at-risk assets declined 33% year over year to $12.4 billion.
• The total capital ratio was strong at 12.9% at the end of the quarter versus 12.2% in the previous quarter and 11.3% a year earlier.
SIVs – Assets Continue to Decline
• Links and Parkland SIV assets declined to US$5.6 billion and €0.62 billion net of cash, as at January 31, 2009, from US$6.8 billion and €0.70 billion in the previous quarter and US$23.4 billion and €3.4 billion at the end of July 2007. The pace of asset sales is slowing.
• Liquidity facilities extended by BMO for Links and Parkland as at January 31, 2009, declined to US$7.1 billion and €0.64 billion, respectively, versus US$8.8 billion and €0.8 billion at the end of April 2008.
Credit Protection Vehicle - Apex
• On May 1, 2008, BMO restructured Apex Trust by providing investors with mid-term notes in Apex Trust with terms of five to eight years in exchange for their original holdings. As part of the restructuring, BMO entered into credit default swap contracts with counterparties and entered into offsetting contracts with Apex Trust. BMO provides a senior funding facility of $1.0 billion and has exposure of $815 million through investment in mid-term notes. The current carrying value of the notes is $448 million after writedowns of $367 million ($248 million in Q1/09).
• BMO believes the credit quality of the trust is sound, with over 70% considered investment grade and a substantial first-loss protection in place.
Fairway – U.S. ABCP Conduit
• Fairway is a BMO-sponsored U.S. ABCP conduit. At the end of January, backstop liquidity facilities were US$7.5 billion down from US$8.2 billion in the previous quarter.
Monoline Exposure
• BMO has direct notional exposure to monolines and credit derivative counterparties of $4.3 billion with $719 million mark-to-market exposure. Counterparties: 91% rated A or better, 83% rated AA or better.
Recommendation
• We are reducing our 2009 and 2010 earnings estimates to $4.45 per share and $4.80 per share from $4.85 per share and $5.00 per share due to higher loan loss provision estimates.
• We are reducing our 12-month share price target to $42 from $45. Our new target price represents a conservative 9.4x our 2009 earnings estimate and 8.8x our 2010 earnings estimate.
• BMO is rated 2-Sector Perform with strong relative retail earnings momentum, although overall low profitability and attractive dividend yield are partially offset by higher off balance sheet risk.
__________________________________________________________
Financial Post, Eoin Callan, 3 March 2009
Some of the largest banks in the world had collapsed and central bankers were still in the midst of a costly bail out of financial institutions.
The directors of the Bank of Montreal were carefully balancing the pressure to pay out a dividend to shareholders and the need to contain the effects of an international financial crisis.
The year was 1829, and as stock markets recovered from the failure of six English banks caught out by bad bets on Latin American credit markets, bank directors decided to proceeded with a dividend payment to shareholders.
The move established a tradition that has endured for 180-years and was reaffirmed on Tuesday as Canada's oldest bank maintained its dividend at 70 cents.
There was no sign that BMO's management had given any serious consideration to cutting the dividend ahead of Tuesday's annual general meeting.
But Bill Downe, chief executive, took time out to reassure shareholders, saying dividends were of perennial importance to retail investors.
"Shareholders of Canadian banks place a high value on consistency," he said, noting BMO had "extended its unmatched record of continuous dividend payment".
The executive acknowledged the pay out ratio had climbed to a relatively high level above 50% of net income when the bank was accumulating excess capital three years ago, and that since then the credit crisis had crimped income.
But he indicated the bank plans to stay the course, in keeping with its "core earnings power".
The executive hinted that the most likely scenario for the bank to reduce its dividend would be further down the road in the context of a big acquisition.
Stephen Foerster, professor at the Richard Ivey School of Business, said Canadian banks had a long history of sustaining dividends during downturns.
"I think Canadian banks will at least maintain their dividends," said the professor, who conducted an extraordinary study of BMO's dividend policy over 175 years.
The professor's detailed financial research explored the trends and factors that contributed to the bank's dividend ratios in each year and found BMO had a long history of generous pay outs.
The study showed bank management had consistently sought to balance the need to reinvest for growth and preserve capital with "the traditional role of dividends" as a source of succour to "the proverbial widows and orphans".
The professor said demand for dividends had only increased as the population aged and more Canadians sought to fund their retirement.
Banks, he said, would remain a favourite for investors who want "some equity exposure but like the stability of a steady dividend."
;
Some of the largest banks in the world had collapsed and central bankers were still in the midst of a costly bail out of financial institutions.
The directors of the Bank of Montreal were carefully balancing the pressure to pay out a dividend to shareholders and the need to contain the effects of an international financial crisis.
The year was 1829, and as stock markets recovered from the failure of six English banks caught out by bad bets on Latin American credit markets, bank directors decided to proceeded with a dividend payment to shareholders.
The move established a tradition that has endured for 180-years and was reaffirmed on Tuesday as Canada's oldest bank maintained its dividend at 70 cents.
There was no sign that BMO's management had given any serious consideration to cutting the dividend ahead of Tuesday's annual general meeting.
But Bill Downe, chief executive, took time out to reassure shareholders, saying dividends were of perennial importance to retail investors.
"Shareholders of Canadian banks place a high value on consistency," he said, noting BMO had "extended its unmatched record of continuous dividend payment".
The executive acknowledged the pay out ratio had climbed to a relatively high level above 50% of net income when the bank was accumulating excess capital three years ago, and that since then the credit crisis had crimped income.
But he indicated the bank plans to stay the course, in keeping with its "core earnings power".
The executive hinted that the most likely scenario for the bank to reduce its dividend would be further down the road in the context of a big acquisition.
Stephen Foerster, professor at the Richard Ivey School of Business, said Canadian banks had a long history of sustaining dividends during downturns.
"I think Canadian banks will at least maintain their dividends," said the professor, who conducted an extraordinary study of BMO's dividend policy over 175 years.
The professor's detailed financial research explored the trends and factors that contributed to the bank's dividend ratios in each year and found BMO had a long history of generous pay outs.
The study showed bank management had consistently sought to balance the need to reinvest for growth and preserve capital with "the traditional role of dividends" as a source of succour to "the proverbial widows and orphans".
The professor said demand for dividends had only increased as the population aged and more Canadians sought to fund their retirement.
Banks, he said, would remain a favourite for investors who want "some equity exposure but like the stability of a steady dividend."
